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Wednesday, May 17, 2006

Listed exchanges pose unique problems

The question of listed exchanges (or "publicly traded exchanges") is now a live one in India. MCX seeks to do an IPO. A recent SEBI report says that regional stock exchanges should do IPOs and list on themselves. BSE could get listed, possibly on BSE.

I wrote an article in today's Business Standard titled Listed exchanges pose unique problems on this subject. I argue that exchanges are not ordinary firms, where we applaud when the firm graduates from startup to IPO. I suggest that listed exchanges pose daunting policy questions and that SEBI and MoF need to do deep thinking about whether India's interests are best served by a three-way separation between owners, managers and brokers.

Why this double standard? Why does every one think free markets are good for everything but the institutions in their field. Everyone from dairy farmers to financial theorists cite "unique problems" to protect their field from the free market.

The listed financial products market in India is incredibly hidebound. Look at the innovation in markets like the US with the coming of players like Island, ISE etc.

The NSE employes ancient technology both for its matching engine and market data dissemination. The pace of introduction of new products is glacial - why bother when there is no innovation. The BSE does not bother since management has no incentive.

Look what happened to the CME and the NYSE since they have gone public . The floors are on their way out and they are aggresively laying out plans to attack other markets - brining innovation and lower costs to investors.

The various reputational issues that you outline are non-starters. Since when is it an exchange's job to track down rumours? No manager will risk the reputation of the exchange in exchange for short term profit especially when his options vests over a multi year period. The various public exchanges world wide - LSE, Deutsche Bourse - are great examples of that. In fact the Deutsche Bourse mounted a great attack on the CBOT forcing it to cut prices and innovate.

We need more learning from the worldwide experience of exchanges that are private/public for-profit institution and dynamos of innovation and efficency instead of promoting the hidebound lame NSE as some paragon of the exchange model.

In a race between the blind (BSE) and the one-legged (the NSE), the one-legged will win. It does not follow that the one-legged will excel in the Olympics.

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